“People are freaked out by the process. People don’t know what they should say to an auditor. Often times people don’t know what rights they have during an audit.”

Everyone stands a chance of being audited at some point. In the 2008-2009 tax year, Canada Revenue Agency performed more than 370,360 audits and reviews.

Ninety-four per cent of Canadians file a personal income tax return every year, according to a recent poll, commissioned by BMO Nesbitt Burns. Of them, 11% do so out of fear of being audited.

You face a higher risk of being audited if you are self-employed or in an industry with a lot of cash transactions such as the construction business. You’re also more likely to be audited if you are not average, says Mr. Barrett. For example, if everyone else in your postal code makes $100,000 a year and you declared an income of $40,000, the taxman might come calling, he says.

“I had a family of recent immigrants [as clients]. There were six children in the family and they were making it on $45,000 a year. Of course, Statistics Canada says if you have six children and you live in the GTA, you need $90,000 a year,” Mr. Barrett says.

“These people were audited because the CRA did not believe they could get by with six kids. If you are not exactly the average of your business type, your area, or your family size and your expenses, you will be audited.”

The moment you receive a letter from the CRA indicating that you are being audited, you should get all of your documents together and make sure they are organized, Mr. Barrett advises. He suggests that you have the auditor come to a neutral place to go through the information such as your accountant or lawyer’s office.

“Don’t let the auditors leave with your originals unless they give you perfectly itemized receipts,” he says. “I would counsel people against hiding anything from the auditor. If you’re going to hide the fact that you have a certain bank account, don’t bother. They’ll find it…They could possibly charge you for evasion.”

I would counsel people against hiding anything from the auditor

If you are paying cash for something, you will need a receipt. If you claim mileage, you might want to show a travel log of your trips (record your kilometres, the date and the purpose of your trip). “I’ve had circumstances where businesses have business vehicles,” Mr. Barrett says. “I’m talking about a truck that pumps concrete. You’re obviously not picking the kids up from school in that truck; but [the CRA will] demand the logs for those vehicles as well.”

It doesn’t say in the law that you need a vehicle log — this is created by CRA policy. Anything that’s policy can be challenged; but it’s better to be on the right side of the policy to begin with so you don’t have to worry, he says.

Finally, watch out for schemes. Aggressive tax planning can take a variety of different forms. The CRA has warned Canadians that “if it seems too good to be true, it probably is,” Mr. Barrett says.

If a tax shelter promoter offers a tax receipt for a larger amount than the donation or payment, for example, it is very likely not a valid donation, he says.